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It's Greek to Me

The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or Silicon
Valley Bank, or any of its affiliates.

Over the past few months we have witnessed the euro soar
higher. The 17-nation currency had appreciated from last year's low of $1.1850
in June and rose near 1.50 on May 4, the strongest since December 2009. The main
catalyst appeared to be higher interest rate expectations for the European
countries. The economies in many of the EU countries are expanding, providing a
sense the worst had passed. In addition, European Union leaders likely viewed
the EUR strength was "a vote of confidence in the euro" and in their efforts to
contain the region's sovereign debt crisis. The rescue packages for Greece,
Ireland and Portugal were allowing investors to cast aside worries over some
euro zone nations and allowed focus on economic growth and interest rates. Over
these past few weeks, there has been a reversal of fortune. Worries about debt
troubles in the euro zone's peripheral economies have pushed the euro more than
9 cents, trading to near 1.40 last week. In addition, media reports — later
denied by European policymakers — indicated that Greece may be considering
exiting the euro. Such reports only highlight the concerns about how to best
free the country from its debt mess.

Credit Rating

The latest worries have, at least temporarily, brought debt
issues again into the forefront. Greece's credit rating was cut to B from BB- by
Standard and Poor's, which said further reductions are possible, putting private
investors at risk if maturities are allowed to be extended on the nation's
emergency aid package. Another rating cut would make Greece the lowest-rated
country in Europe as S&P's latest move left it on par with Belarus. It was
the fourth reduction by S&P since April 2010. Concern that Greece will
restructure its debt has caused investors to demand more than 12 percentage
points in yield to invest in the Greek 10-year note over the German bunds of
similar maturity. The 2-year Greek bond is now yielding over 26 percent, up from
25 percent after the unions held walkouts last week. Greece could receive new
aid as early as June to help it meet funding requirements. The problem is that
financial markets have stopped believing any official announcement on Greek
finances. Without any restructuring of Greek debt, the threat has turned the
bailouts into a bottomless pit that could ultimately also affect the stronger
euro zone nations. With such uncertainty, some expect the euro to slide
further.

Opposing Forces

Another cause for the recent EUR demise was a slight change in
the interest rate outlook. As the EUR had risen in value, the talk from European
financial leaders was the growing concern about inflation. At the latest ECB
council meeting, interest rates were left unchanged. To the market's surprise,
the ECB comments also signaled no rate hike in June as many expected, which
pushed bund futures higher, and the euro lower. However, the central bank is
still stressing that the risk of inflation is increasing .It is believed further
hikes are in the pipeline, but perhaps at a slower pace. ECB officials have
suggested that the central bank will make the decision based on updated data. If
the latest growth numbers are any indication, a rate hike in July seems likely.
Overall, euro zone GDP accelerated more than expected. The acceleration was
driven by 1.5 percent quarter-on-quarter growth in Germany and 1.0 percent
growth in France. ECB President Trichet repeated that economic data since the
last ECB meeting confirmed that the "adjustment of the current very
accommodative monetary policy was warranted." The ECB continues to see upward
pressure on overall inflation. The central bank stressed that it is essential
that "recent price developments do not give rise to broad based inflationary
pressures" and that inflation expectations remain firm.

Little Certainty

"The only thing that seems 100 percent certain is that Greece
remains mired in debt and that at least a good portion of that debt is at risk
of not being repaid should the situation not change considerably, both in terms
of the financial metrics and spending levels within the country itself," said a
market analyst. Thus, the EUR is vulnerable to growing worries despite the
focused on the longer-term outlook for higher rates in the euro zone compared
with the United States. Euro zone inflation had pushed the ECB's hand in raising
key rates, but the sovereign debt problems in the region's periphery spreading
to the region's larger economies has halted some optimism over future rate
rises. The EUR can only be as strong as its weakest link. Oh and by the way, I
wonder how the German taxpayers feel about bailing out Greece. Expect more
volatility ahead.

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.

Over the past few months we have witnessed the euro soar higher. The 17-nation currency had appreciated from last year's low of $1.1850 in June and rose near 1.50 on May 4, the strongest since December 2009. The main catalyst appeared to be higher interest rate expectations for the European countries. The economies in many of the EU countries are expanding, providing a sense the worst had passed. In addition, European Union leaders likely viewed the EUR strength was "a vote of confidence in the euro" and in their efforts to contain the region's sovereign debt crisis. The rescue packages for Greece, Ireland and Portugal were allowing investors to cast aside worries over some euro zone nations and allowed focus on economic growth and interest rates. Over these past few weeks, there has been a reversal of fortune. Worries about debt troubles in the euro zone's peripheral economies have pushed the euro more than 9 cents, trading to near 1.40 last week. In addition, media reports — later denied by European policymakers — indicated that Greece may be considering exiting the euro. Such reports only highlight the concerns about how to best free the country from its debt mess.

Credit Rating

The latest worries have, at least temporarily, brought debt issues again into the forefront. Greece's credit rating was cut to B from BB- by Standard and Poor's, which said further reductions are possible, putting private investors at risk if maturities are allowed to be extended on the nation's emergency aid package. Another rating cut would make Greece the lowest-rated country in Europe as S&P's latest move left it on par with Belarus. It was the fourth reduction by S&P since April 2010. Concern that Greece will restructure its debt has caused investors to demand more than 12 percentage points in yield to invest in the Greek 10-year note over the German bunds of similar maturity. The 2-year Greek bond is now yielding over 26 percent, up from 25 percent after the unions held...Read More

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